When Raj and Priya had their first child, one of their primary concerns was ensuring a secure future for their little one. They knew that a good education would play a crucial role in this, but the rising costs of education worried them. After consulting with a financial advisor, they decided to start a Systematic Investment Plan (SIP) specifically for their child’s education – this decision not only gave them peace of mind but also provided a structured way to save and grow their money over time. Accordingly, let us explore the importance of education planning, the process of starting an education SIP, calculating the required investments, the benefits of starting early, tax benefits, and the overall impact on securing your child’s future.
Importance of education planning
Education is, without a doubt, amongst the most significant investments you can make for your child's bright future. With the ever-increasing cost of schooling and higher education, planning for these expenses has become more critical than ever. Proper education planning ensures that you have the necessary funds available when your child needs them, allowing you to provide quality education without financial stress. It also instils financial discipline, encouraging parents to save systematically and invest wisely. By planning early, you can take advantage of compounding returns, making it easier to meet the future education costs.
Starting education SIP plan
A SIP is an effective and disciplined way to save and invest for your child’s education as an education SIP allows you to invest a fixed amount regularly in a mutual fund scheme, which helps in building a substantial corpus over time. To start an education SIP, you need to identify the future education expenses, choose the right mutual fund schemes, and decide on the investment amount and frequency. Opt for funds that align with your risk tolerance and investment horizon – equity mutual funds are often recommended for long-term goals like children’s education due to their high risk-high return nature. Given the long-term horizon, your equity mutual fund will have the ability to weather short-term volatilities in the stock market, thereby mitigating the risk to an extent.
Calculating required investments
Calculating the required investments for your child's education involves estimating the future cost of education and determining the amount you need to invest regularly. Consider factors such as tuition fees, accommodation, books, and other related expenses. Use an SIP calculator to get an accurate estimate of how much you need to invest each month to reach your goal. For instance, if you estimate that you will need INR 2 crores for your child’s higher education in 15 years, an SIP calculator can help you determine the monthly investment required based on the expected rate of return. This approach ensures that you are systematically working towards accumulating the needed funds.
Benefits of starting early
Starting an education SIP early offers several benefits:
- Compounding returns: Investing early allows you to benefit from the power of compounding, where the returns on your investments also generate returns.
- Reduced financial burden: By spreading out your investments over a longer period, you reduce the financial burden and avoid large, lump-sum payments.
- Rupee cost averaging: Regular investments help in averaging out the cost of units purchased, mitigating the impact of market volatility.
- Flexibility and discipline: An SIP encourages financial discipline and offers the flexibility to adjust the investment amount as per changing financial circumstances.
Tax advantages to consider
Investing in mutual funds for your child’s education also provides tax benefits under Indian tax laws. Equity-linked savings schemes (ELSS), a type of mutual fund, offer tax deductions under Section 80C of the Income Tax Act, up to INR 1.5 lakhs per year. Additionally, the long-term capital gains (LTCG) from equity mutual funds are tax-free up to INR 1.25 lakhs per financial year. Beyond this threshold, LTCG is taxed at a rate of 12.5%, with effect from July 23, 2024, prior to 23rd July, 2024 the LTCG was 10% on gains exceeding Rs. 1lac.
These tax benefits can significantly enhance the returns on your investments, making SIPs an attractive option for education planning.
SIPs provide a structured, disciplined, and effective way to secure your child’s educational future and by starting an education SIP early, you can leverage the benefits of compounding returns, reduce the financial burden, and take advantage of tax benefits. The instance of Raj and Priya highlights how early planning and systematic investing can lead to a financially secure future for their child, free from the worry of escalating education costs. Whether you are new to mutual fund investment or an experienced investor, considering an SIP for your child's education planning is a prudent decision. With careful planning and regular investments, you can ensure that your child has the financial support needed to pursue their educational aspirations, ultimately securing their future and empowering them to achieve their dreams.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
